2016 (11) TMI 1067 - AT - Income Tax

Deduction claimed under Section 80-IC(3)(ii) - carry forward and set off of losses - Held that - From the record we found that during the year under consideration, the assessee has no unabsorbed carry forward loss in respect of eligible undertaking at Uttarakhand. Losses of earlier assessment years 2008-2009 and 2009-2010 in Uttarakhand unit had already been set off against the profit of unit at Mumbai. Thus, the undisputed facts are that assessee has claimed for the first time during the year under consideration its claim of deduction u/s. 80IC in respect of its Uttarakhand unit. Since Uttarakhand unit has no unabsorbed carry forward losses during the year under consideration, therefore, assessee has claimed deduction in respect of the entire income of the Uttarakhand unit during the year under consideration. The undisputed facts are that losses of assessment years 2008-2009 and 2009-2010 have already been set off against the income of unit at Mumbai. The said losses were not available to be carried forward and set off during the year under consideration i.e., assessment year 2010-2011 under these facts and circumstances, applying the proposition of laws discussed above as referred by learned AR, we do not find any merit in the action of lower authorities for notionally carry forward and set off of losses which have already been set off in the earlier years against the profit of eligible unit during A.Y.2010-11 under consideration.

Issues Involved:
1. Deduction under Section 80-IC(3)(ii) of the I.T. Act.
2. Notional carry forward and set off of losses.
3. Interpretation of Section 80-IA(5) and its applicability.

Issue-wise Detailed Analysis:

1. Deduction under Section 80-IC(3)(ii) of the I.T. Act:
In the appeal, the assessee contested the reduction of the deduction claimed under Section 80-IC(3)(ii) of the I.T. Act. The Assessee Company, engaged in manufacturing, assembling, and repairing construction machinery and piling equipment, had an additional unit in Uttarakhand, a declared backward area, and eligible for excise duty exemption and income tax exemption under Section 80IC(3)(ii). The company commenced production in Uttarakhand in the Assessment Year 2008-09, incurring losses in the initial years which were set off against the income of the non-eligible unit in Mumbai. The A.O. reduced the deduction claim by notionally carrying forward these losses and setting them off against the profits of the eligible unit for the year under consideration.

2. Notional Carry Forward and Set Off of Losses:
The A.O. notionally carried forward the losses of A.Y.s 2008-2009 and 2009-2010, which were already set off against the profit of the non-eligible unit at Mumbai, and set them off against the profit of ?4,48,33,073/- of the eligible unit at Uttarakhand for A.Y. 2010-11. This resulted in a reduced deduction under Section 80IC. The CIT(A) upheld this approach. The assessee argued that there were no brought forward losses in respect of the eligible unit during the year under consideration, and the A.O. was not justified in artificially carrying forward the unabsorbed losses of earlier years.

3. Interpretation of Section 80-IA(5) and Its Applicability:
The assessee relied on multiple judicial precedents, including the Madras High Court decision in Velayudhaswamy Spinning Mills Pvt. Ltd. vs. ACIT, which held that losses of earlier years, already set off against other income, cannot be notionally brought forward for set off against the current income of the eligible business. The court emphasized that once losses are set off in earlier years, the revenue cannot rework the set-off amount and bring it notionally. Several other cases, including Eagle Press Pvt. Ltd. vs. ACIT, CIT vs. M/s. Kongoor Textile Process, and CIT vs. Anil H. Lad, supported this interpretation, reinforcing that the notional set off of losses is not permissible under Section 80-IA(5).

Conclusion:
The tribunal, following the judicial precedents, concluded that the revenue cannot notionally carry forward and set off losses of earlier years that have already been set off against the income of the non-eligible unit. The tribunal allowed the assessee's claim for deduction under Section 80IC without the notional set off of earlier years' losses. The appeal was partially allowed, with the tribunal not finding any merit in the lower authorities' action of reducing the assessee's claim for deduction.

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